The review looked at home credit, pawnbroking,  payday loans and the rent-to-buy market.

One of the more recent entrants to the high-cost credit market – payday loans – has come under fierce criticism from campaign groups and MPs. Some charge interest rates in excess of 2,000%, a factor that prompted the Archbishop of Canterbury, Rowan Williams, to call for “an urgent review” of such rates two years ago. At that time, Debt On Our Doorstep, a coalition of debt charities and credit unions, tabled a motion in parliament calling for an investigation into payday loans.

The OFT said today that it had considered the case for price controls for pawnbroking, payday loans, home credit and rent-to-buy credit and concluded they would not address the problems in the sector. It said such controls could further reduce competition in the sector and lead lenders to recover lost income through increasing charges for late payment and default.

It said, instead, that it was recommending improvements to the way the markets operate, including an industry-wide code of practice and more information about such loans to be published on price comparison websites. Some of these, such as Moneysupermarket.com, actually sell payday loans.

Ray Watson, OFT director of corporate services credit, said: “Our report has found that people who use high-cost credit have limited options and find it difficult to exercise what choice they have to obtain the best deal.

“This means competition between suppliers is less effective than it might be. The recommendations we are making would deliver worthwhile improvements to these markets but more radical approaches, outside the remit of the OFT, need to be examined by the government if the fundamental and long-standing issues of lack of consumer power and limited supply are to be tackled.”

Mick McAteer, founder and director of the Financial Inclusion Centre, said he was “deeply disappointed” by the OFT’s findings. “There is no justification for a failure to impose price controls in this sector,” he said. “We were hoping to see a cap on charges phased in over three years while social lenders build up their capacity to offer alternative forms of finance.”

Social lenders include businesses such as Fair Finance, which offers financial products and services to the financially excluded in London, and credit unions.

The Finance & Leasing Association, the trade association for the asset, consumer and motor finance sectors in the UK, said it agreed with the OFT’s findings on price controls. Head of consumer finance, Fiona Hoyle, said: “They would have adverse unintended consequences for consumers, including for the cost and availability of credit.

“We hope that the government will take careful note of these arguments against price capping when it considers the credit and store card markets.”

Commenting on the report, independent consumer body Consumer Focus said that “simply clamping down on high cost lenders will not provide the answer”.

“The OFT’s report shows that it would be very hard to boost competition among high-cost lenders and drive a better deal for consumers,” said Marie Burton, financial services specialist at Consumer Focus. “It is therefore important that the government considers how it can make sure that lower-cost borrowing, like credit unions, is available to borrowers on low incomes.”

A report this week revealed up to 67,000, or 7%, of those struggling with debts say they have already contacted a loan shark or doorstep lender, while a further 13% have considered doing so.

Steven Law, president of R3, the trade body for insolvency professionals that commissioned the research, said: “Going to this source for financial resolution will simply build up a larger store of debt and create more pressure and stress.”

Original article here.

The code is designed to reinforce the codes of practice issued by the Office of Fair Trading (OFT) and the Finance and Leasing Association (FLA), which the alternative lender currently abides by.

Errol Damelin, founder and chief executive officer of Wonga, said: “For us it was a case of formalising a social contract which we feel we have had since the beginning with our customers, the need to be transparent, flexible and communicative.”

Damelin added that lack of transparency was the main factor driving negative media coverage of the alternative lending industry.

He added: “I think there is a lot of misunderstanding and a fixation on APR, which doesn’t help customers or the debate, but we need to be honest about ourselves; we don’t hold ourselves up to be perfect and we always try to improve.”